Politically Exposed Person

In financial regulation, "politically exposed person" (PEP) is a term describing someone who has been entrusted with a prominent public function, or an individual who is closely related to such a person. The terms PEP, Politically Exposed Person and Senior Foreign Political Figure are often used interchangeably, particularly in international fora. Although the term PEP is not used in FinCEN’s regulations, it is to a great extent similar to the definition of Senior Foreign Political Figure, as defined by section 312 of the USA PATRIOT Act and it is a term recognised (and defined) by the Wolfsberg Group of eleven global banks. Neither the Financial Action Task Force on Money Laundering (FATF) definition nor the USA PATRIOT Act definition of this term are intended to include middle-ranking or more junior individuals in the categories listed in the below definition or officials of local governments. As of February 2012, the FATF definition of a PEP was revised to include domestic PEPs. Although the true number of PEPs globally is not known, one database of PEPs contains over 1.2 million unique profiles for PEPs.

The term Foreign Official is used by enforcement agencies relating to persons who have similar characteristics as PEPs, but this term is used in all industries, not just by financial institutions, and is referenced in the Foreign Corrupt Practices Act in the United States.

By virtue of their position and the influence that they may hold, a PEP generally presents a higher risk for potential involvement in bribery and corruption. Most financial institutions view such clients as potential compliance risks and perform enhanced monitoring of accounts that fall within this category.

The process of screening for PEPs is usually performed at the beginning of account opening, called initial due diligence, and screening of accounts periodically is performed as part of ongoing due diligence. The process of due diligence to uncover PEPs can be time consuming and requires screening against a reputable database of known PEPs, usually close to 1 million profiles, against the names, dates of birth, national identification numbers and photos of clients.

Heavy fines have been imposed on financial institutions such as Riggs Bank for conducting business with PEPs without following adequate Know Your Customer procedures and enhanced due diligence processes. PEP-specific compliance legislation underlines the link between corrupt politicians, money laundering and the financing of terrorism. Since September 11, 2001, more than 100 countries have changed their laws related to financial services regulation, with the fight against political corruption playing a fundamental role. Despite attempts at regulation, certain political leaders like Muammar Gaddafi and Hosni Mubarak have made news for having frozen assets located in US banks that did not follow these processes for these individuals.

The designation “Politically Exposed Person” dates back to the late 1990s in what was known as the “Abacha Affair.” Sani Abacha was a Nigerian dictator who organized (with his family members and associates) a network of massive theft of assets from the government of Nigeria. It is believed that several billion dollars were stolen, and that the funds were transferred to bank accounts in the United Kingdom and Switzerland.

In 2001, in an effort to recover the money, the Nigerian Government that succeeded the Abacha Regime lodged complaints with several European agencies, including the Federal Office of Police (FOP) of Switzerland which, in turn, investigated close to sixty Swiss banks. In this investigation, the concept of “Politically Exposed Person” emerged, which was later included in the 2003 United Nations Convention against Corruption.